What bubble? Chegg sinks in market debut after Twitter's big pop

President and CEO Dan Rosensweig of Chegg ring the opening bell to celebrate their IPO at the New York Stock Exchange on November 13, 2013 in New York City. (Photo by Ben Hider/NYSE Euronext) (Ben Hider)

SANTA CLARA -- Wall Street investors proved Wednesday their enthusiasm for Twitter does not extend to all Silicon Valley tech companies debuting on the public market.

Educational-services company Chegg saw its price fall in its first trades Wednesday morning after an initial public offering that brought in $187.5 million at an initial valuation of more than $1 billion. After pricing its debut shares at $12.50 -- $1 higher than its proposed range, the same as Twitter -- the stock dipped more than 20 percent in its debut on the New York Stock Exchange under the symbol CHGG. Chegg shares sold in a range from $9.50 to $11.25 before closing at $9.68, a very different experience from Twitter's 70 percent rise in its debut day on Wall Street, which led observers to fear a bubble that overvalued Silicon Valley tech firms.

"On any given day, including the day you take a company public, the stock can go up or the stock can go down, (but) it's really the long-term value that gets delivered within these companies" that matters, Paul Holland, a general partner at venture investor Foundation Capital and Chegg board observer, said Wednesday.

Founded in 2005 by a group of Iowa State students, the company's name refers to the chicken-and-egg dilemma of students who need jobs to pay for college, but have difficulty getting good jobs without an education. Chegg's co-founders hoped to get around that problem by helping users cut their college costs; textbooks and supplies cost students roughly $1,200 a year, the company states in its IPO filing.

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Chegg sought to change the system for dispersal of college textbooks: While bookstores typically sell textbooks to college students and buy them back for a much smaller price at the end of a semester, Chegg began renting the textbooks to students for a smaller per-semester fee.

President and CEO Dan Rosensweig of Chegg ring the opening bell to celebrate their IPO at the New York Stock Exchange on November 13, 2013 in New York City. (Photo by Ben Hider/NYSE Euronext) (Ben Hider)

Holland compared Chegg to another Foundation investment, Netflix (NFLX), explaining that Chegg has grown as the market for its products changes into a completely digitized delivery system, giving it a big head start on the bucketload of companies attempting to innovate in the higher-education space.

"The additional element with Chegg is the broader set of offerings, the fact that we can be involved in many different aspects of a student's life," Holland added. "The physical textbook market was a great opening for that, and then over time we'll be in a lot of different areas, and those areas are all going to grow quite dramatically."

Chegg has already expanded its offerings to include study help and assistance for high school students looking to gain entry to college, and those efforts have managed to capture the attention of an audience of young men and women that advertisers crave: The company said in its prospectus that it reaches 30 percent of all college students and 40 percent of college-bound high school seniors.

Holland said that reach has already helped Chegg begin to offer marketing services for other companies.

"We have so much outreach and we deal with so many college consumers that we're finding ways to help package up other people's offerings and deliver them to college students and rising college students," he said in a Wednesday phone interview.

Chegg has landed almost $200 million from Foundation and other venture capital firms such as Floodgate and Kleiner Perkins Caufield & Byers, and the board includes ex-Netflix CFO Barry McCarthy and 49ers CEO John York. CEO Dan Rosensweig took the company's reins in 2010 after stints at Yahoo (YHOO), ZDnet and Activision's Guitar Hero division.

Chegg's net losses grew each of the past three full years, but the company also managed to increase revenues sequentially as well. In 2012, Chegg lost $49 million on revenues of $213.3 million, and the Santa Clara company lost $50.4 million in the first nine months of this year while generating revenues of $178.5 million.

The company is selling all but 600,000 shares of the 50 million shares offered in its IPO, with the rest belonging to cofounder Aayush Phumbhra, who will retain nearly 2 million shares after the IPO. Chegg's other cofounder, Osman Rashid, sold an education-focused startup he founded after Chegg to Intel (INTC) for an undisclosed amount last week.

Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/jowens510.